Interest: silly bullshit causes exaggerated squeeze – 03/22/2023 – Vinicius Torres Freire

The Central Bank didn’t give a damn about the government’s babbling and other interest rate critics. He made a point of saying so in several of the lines of the statement in which he announced his decision to keep the Selic rate at 13.75%. The BC did not even mention the possibility of a cut. He just mentioned the possibility of a drop in inflation if the economy, here and abroad, fails.

For those interested in the political politics of economic conversation, this is the summary of the opera.

What can the government do? As the cliché about judo says, using the strength of the “adversary” to turn the game (on creditors and on those who expect high inflation). If there is more clumsy or aggressively crazy reaction (more mandatory spending, enacting low interest rates and prices, etc.), the situation gets worse.

Yes, it is quite possible that the economy will run out of air soon. May? Let’s go for a probably exaggerated squeeze because of quarrels and silly and ignorant ideas.

Even if the Selic were to lower soon and up to 12% in December, the situation would change from water to water with a spoonful of wine. It improves, of course, but the basic problem is not there.

But the government thinks that by issuing decrees or changing the word “expense” to “investment”, these silly things, the thing will be resolved. It’s a very primitive and rudimentary conversation.

What can cause inflation to fall below what the Central Bank now predicts?

New drop in commodity prices, in reais: 1) the dollar has to help too; 2) World economy cools down more than expected, especially because of the financial turmoil; 3) In Brazil, credit crunch greater than normally expected.

The message for now is: it will only be good if it is bad. It should be noted, moreover: even with such risks, the Central Bank did not cut interest rates.

Yes, it helps if the government comes up with a tough plan to limit spending and debt—”hard” isn’t going to happen. The BC’s novelty was the mention of credit suffocation — it can happen.

According to the numbers spit out by BC models, the Selic will remain at 13.75% until Saint Never Day, in the afternoon. That is, the IPCA will only reach the 3% target for 2024 if the Selic remains where it is until the end of next year (this is the BC’s so-called “alternative scenario”). It shouldn’t be that bad, but that’s the warning.

There was no surprise in the decision, exposition of reasons or analysis of the situation presented by the BC, which followed the manual.

The inflation expectation of “the market” for 2023 and, more relevantly, for 2024, is “unanchored”. In other words, it increased since the previous Copom meeting (early February). In fact, it has practically stopped climbing since the beginning of March, but has stopped at the heights.

The forecast for accumulated inflation over the 12 months up to the third quarter of 2024 is 3.8% (it has worsened), under the premise that the Selic rate will fall as predicted by the median of economists’ projections (it is the BC’s “reference scenario” ).

There are risks of inflation being higher than expected, says the Central Bank, as world high prices may be persistent, there is fiscal uncertainty and greater or more lasting “disanchoring” of inflation expectations.

The BC even begins its statement of reasons by citing the global sururu. Soon afterwards, however, he says that economic activity and inflation are resisting. Their peers at the European Central Bank and at the Fed, the American Central Bank, believe that the risk of inflation is greater than that of a financial crisis and its recessive or convulsive effects. The ECB raised interest rates last week. He has made a point of saying that the financial crisis and inflation are topics that can be dealt with separately. The Fed said on Wednesday that the banking turmoil could dampen growth and perhaps thus inflation, but it is too early to tell.

Here, there is no sign of refreshment.

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